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Brazilian revenue service publishes draft of normative ruling governing the country-by-country report under the BEPS project and opens public consultation no. 11/2016

9Nov2016Nov9,2016
Tax
​Brazilian revenue service publishes draft of normative ruling governing the country-by-country report under the BEPS project and opens public consultation no. 11/2016​

On November 7, 2016, the Brazilian Revenue Service (RFB) announced on its website Public Consultation RFB No. 11/20161 introducing for discussion the Normative Instruction (NI) that will regulate the annual obligation of certain Brazilian multinational enterprises to submit the so-called Country-by-Country (CbC) Report. Such report is one of the commitments assumed by Brazil under the Base Erosion and Profit Shifting (BEPS) Project, coordinated by the Organization for Economic Cooperation and Development (OECD).

As is well known, the objectives of the BEPS Project primarily focus on studying global mechanisms for countering tax avoidance strategies that exploit gaps and mismatches in tax rules in order to artificially shift profits to low or no-tax jurisdictions.

One of such mechanisms is contemplated in BEPS Action 13 (Transfer Pricing Documentation and Country-by-Country Reporting), which aims at enhancing transparency into the handling and exchange of information by providing tax authorities with adequate data to assess high-level information relating to the activities of large economic groups around the world.

In this regard, BEPS Action 13 provides a template for multinational enterprises (MNEs) to report
the information considered relevant for achieving the Project’s purposes annually and for each tax jurisdiction in which they do business. This template is called the CbC Report, which was freely translated in the NI as Declaração País-a-País.

We now describe, in general terms, the main aspects of the RFB’s initial draft of the NI under public consultation which will introduce into Brazilian domestic law the obligation to submit the annual CbC Report.

WHICH ENTITIES ARE OBLIGED TO SUBMIT THE CbC REPORT?

Pursuant to the RFB’s initial draft of the NI, the CbC Report must be submitted by any constituent entity that is part of an MNE economic group, has its tax domicile in Brazil and which also:

(i) qualifies as the ultimate parent entity of an MNE group; or
(ii) qualifies as the surrogate parent entity, where the MNE group’s ultimate parent entity has
its tax domicile abroad, and meets certain other conditions further detailed in the NI.

Concerning item (ii) above, even if an entity (domiciled in Brazil for tax purposes) does not fit in such cases, it will still be obliged to submit the CbC Report in the following situations:

(i) the MNE group of which it is part has not designated a surrogate parent entity; or
(ii) there is a certain systemic failure in the tax jurisdiction where the designated surrogate parent entity is domiciled.

WHICH ENTITIES ARE EXEMPT FROM SUBMITTING THE CbC REPORT?

Under the NI, certain Brazilian constituent entities that are actually part of an MNE group are exempt from submitting the CbC Report provided that the total consolidated revenue of such MNE group in the fiscal year prior to the fiscal year of filing (as reflected in the consolidated financial statements of the ultimate parent entity) is less than:

(i) BRL 2,260,000,000.00 (two billion two hundred and sixty million Reais) if the ultimate parent entity is domiciled in Brazil for tax purposes; or
(ii) EUR 750,000,000.00 (seven hundred and fifty million Euros) or the equivalent amount converted to the domestic currency of the ultimate parent entity’s tax jurisdiction as of January 31, 2015.

Moreover, any Brazilian constituent entity that is part of an MNE group (whether or not obliged to submit the CbC Report) must inform the RFB, by means of its Tax and Accounting Bookkeeping (Escrituração Contábil Fiscal - ECF), of the following: (i) if it is the MNE group’s ultimate parent entity; or (ii) if it is a surrogate parent entity; or (iii) if neither of the above apply, the identification and tax jurisdiction of the reporting entity of the MNE group to which it belongs, subject, in case of noncompliance, to a penalty of not being able to transmit the ECF corresponding to that calendar year.

HOW THE CbC REPORT SUBMITTING PROCESS WILL TAKE PLACE?

The CbC Report must be submitted annually, with respect to the immediately preceding fiscal year, upon completion and transmission of the ECF to the Public Digital Bookkeeping System (Sistema Público de Escrituração Digital - Sped).

WHAT IS THE DEADLINE FOR SUBMITTING THE CbC REPORT?

Under the RFB’s initial draft of the NI, the first CbC Report will relate to the fiscal year beginning as of January 2016 and the deadline for submission is that established for completion and transmission of the ECF to the Sped.

WHAT KIND OF INFORMATION MUST BE PROVIDED UNDER THE CbC REPORT?

In accordance with the initial draft of the NI, the CbC Report should contain:

(i) aggregate information for each jurisdiction in which the MNE group operates, relating to: (a)
the total amount of revenue and the revenues obtained from related and unrelated parties; (b)
the amount of profit or loss before income tax (IT); (c) the amount of IT paid and the amount of IT due; (d) the amount of capital stock and retained earnings; (e) the number of employees; and (f)the amount of tangible assets other than cash and cash equivalents;

(ii) identification of all the constituent entities that are part of the MNE group, by indicating: (a)its tax jurisdiction and, if different, the jurisdiction under whose tax laws that entity is established; and (b) the nature of its main economic activities; and

(iii) further information, to provide additional clarification, at the MNE group’s sole discretion.

WHAT ARE THE ENFORCEABLE PENALTIES IN THE EVENT OF BREACH OF ANY OF THE OBLIGATIONS UNDER THE NI?

If a constituent entity that is part of an MNE group and has its tax domicile in Brazil fails to comply with the obligations set forth in the NI (whether or not it is obliged to submit the CbC Report) or does comply, but with inaccuracies or omissions, the NI establishes that such entity will be required to provide clarification to the RFB, and will also be subject to the following penalties:

(i) for late submission: (a) BRL 500.00 (five hundred Reais) per calendar month or fraction of a month, in respect of entities that are beginning their activities or, according to its most recent ECF, that are subject to the presumed profit method for the calculation of corporate income taxes; or (b)BRL 1,500.00 (one thousand five hundred Reais) per calendar month or fraction thereof, in relation to other entities;

(ii) for non-compliance with notification by the RFB to start complying with the obligations established by the NI or to provide clarification within the deadlines imposed by the relevant tax
authority: BRL 500.00 (five hundred Reais) per calendar month; and

(iii) for inaccurate, incomplete or omitted information: 3% (but not less than BRL 100.00 (one hundred Reais)) of the value of the relevant commercial or financial transactions in respect of which the information was omitted, inaccurate or incomplete.

The penalties under item (i) above may be reduced by half when the obligation is complied with prior to any ex officio proceedings being initiated by the RFB.

FINAL REMARKS

Interested parties may submit comments and suggestions regarding the initial draft of the NI under Public Consultation RFB No. 11/2016 until November 21, 2016, by means of an electronic form available on the RFB’s website under the section “Public Consultations and Editorial”.

For reference purposes, the complete Public Consultation RFB No. 11/2016 may be found here​.
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